Pros and Cons of Reverse Mortgages

You may have heard of a reverse mortgage as an option if you’re retired. But what, exactly, is a reverse mortgage and how could it benefit you? What are the pros and cons of doing a reverse mortgage? Learning everything you can about your reverse mortgage options is an essential part of financial planning.

What Is a Reverse Mortgage?

A reverse mortgage is similar to a regular mortgage in that it’s a loan that is taken out using the home as collateral. In a regular mortgage, however, you take out the loan in order to purchase the home in the first place, and then as you pay down the mortgage, you gain equity in the property. In a reverse mortgage, however, you sell equity that you already have in your home in exchange for monthly payments. In this sense, a reverse mortgage is the exact opposite of a mortgage because your equity in the house decreases rather than increases over time.

Who Takes out a Reverse Mortgage?

Typically, those who are taking out reverse mortgages are retirees. This is because they’re more likely to have more equity in their homes to sell and may have already paid off their mortgages in full. Additionally, they may take out a reverse mortgage in order to supplement their retirement income.

What Are the Benefits of Taking out a Reverse Mortgage?

There’s a reason reverse mortgages are popular. They do offer a lot of benefits to those who take them out. These benefits include the following.

You Have More Money in Your Retirement

The primary reason someone would take out a reverse mortgage is to have more money to fund their retirement. Many people may have limited financial resources after they’ve stopped working and their own retirement funds and Social Security may not be enough. A reverse mortgage can provide you with additional income.

You Can Stay in Your Home

Some people who need more money in their retirement may consider selling their homes in order to downsize to something with lower expenses. A reverse mortgage instead allows you to remain in your home without having to sell it. Instead, you can continue to live there and sell the equity to the bank over time in the form of a reverse mortgage.

The Amount Owed Can’t Exceed the Property’s Value

House values fluctuate over time. The amount of an agreed-upon reverse mortgage, however, won’t. This means that it’s possible for the balance on a reverse mortgage to be greater than the actual value of the house. However, the actual amount that is owed can’t exceed the value of the house, even if the total balance does exceed it, and because a reverse mortgage is a type of non-recourse financing, the loan-holder cannot make a claim against the heirs of those who took out the reverse mortgage or against any other assets you may own.

A Reverse Mortgage Is Not Taxable

Another benefit of a reverse mortgage is that it’s not taxable. This is because it’s not considered regular income. Instead, according to the IRS, the payments from a reverse mortgage count as proceeds from a loan. It’s a good idea to discuss the tax implications of a reverse mortgage with a financial advisor before actually taking out the loan, however.

What Are the Drawbacks of a Reverse Mortgage?

Despite its advantages, there are also some drawbacks to taking out a reverse mortgage.

Reverse Mortgages Involve Fees

Typically, there are fees associated with taking out a reverse mortgage that you would have to pay. These fees can include lender fees, origination fees, insurance charges, and closing costs. Instead of having to pay these outright, they could be added to the balance of the loan. However, this would mean less equity in the home sooner.

You Could Lose Your Home to Foreclosure

Because you don’t own all of the equity in your home anymore with a reverse mortgage, it’s possible for your home to be foreclosed. Despite not owing a monthly payment for the reverse mortgage, you do still owe homeowners’ insurance and property taxes as well as, depending on where you live, possibly also HOA fees. If anything else that you owe regarding your property hasn’t been paid, your home could be foreclosed.

You Can Only Deduct a Reverse Mortgage from Taxes After Paying it Off

Although payments from a reverse mortgage are not taxable, you can’t deduct a reverse mortgage from your taxes until it’s been paid off in full.

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